Is now the right time to purchase the commercial real estate you’ve been leasing?
Well, it depends.
That’s never the answer you want to hear, but it’s the only one that makes sense when it comes to owning your business’s office, retail, or industrial space.
That’s because there are clear pros and cons related to both purchasing a property and continuing to pay rent each month.
Ultimately, the decision you make should depend on the current state of your business and your long-term financial goals.
Fortunately, we’re here to help you weigh your options and get closer to making a sound decision. Here are some of the key benefits and drawbacks of purchasing or leasing commercial real estate.
Benefits of purchasing commercial real estate
The opportunity to build equity. Purchasing your space will provide you with an investment that will allow you to build equity over time as you continue to pay off your mortgage and/or as the property increases in value. If you expand your business or need additional financing, this equity can eventually be used as collateral.
Fixed mortgage payments. If you choose a fixed-rate loan term, such as the 30-year fixed rate solution provided by Commercial Direct, a division of Silver Hill Funding, LLC, your monthly payments would remain the same over the life of your loan’s term. This is especially beneficial in competitive markets where rental costs can fluctuate based on increased demand.
Tax benefits. If you purchase your property, you have the ability to depreciate the building over the lifespan of the asset — potentially saving you a substantial amount of money when calculating your taxes and earnings each year. There are additional tax deductions that can be taken when you own commercial space, including mortgage interest, property taxes, and more. Be sure to consult a tax professional for more detailed information regarding potential tax benefits.
Freedom. Once you own your commercial space, you have more freedom to make improvements that can benefit your business. If you purchase a retail property for example, you could create more room for inventory through a renovation of the interior space.
Drawbacks to purchasing commercial property
Lack of flexibility. Purchasing a commercial property can create a lack of flexibility for your business to meet its future needs. Even if your space is perfect now, what happens when your business outgrows your current property sometime down the road?
Significant costs upfront. Perhaps one of the biggest disadvantages to purchasing commercial property is the fact that large initial payments are typically due up front, including a down payment, appraisal fees, loan fees, and more. If a business is not currently generating sufficient revenue to cover these costs, it may not be the right time to consider a purchase.
Benefits of leasing commercial real estate
No large down payment. A benefit to leasing commercial space is that you don’t have to put down a large down payment. While you likely will still have to pay a security deposit, this is usually a much smaller payment than you’d expect with a mortgage loan.
No costly upkeep or repairs. Another benefit to leasing space is that the landlord is responsible for property repairs. Typically, your landlord will also be responsible for common area maintenance, which includes landscaping, building repairs, and more.
Room to grow. Another major advantage of leasing is the flexibility it offers. Depending on the structure of the lease you sign, you have the freedom to move when your needs as a business owner change.
Drawbacks to leasing commercial real estate
The costs can vary. Those who rent their space know that there is always the potential for a rent increase when renewing a lease. This can present a significant disadvantage for your business, forcing you to either renew your lease at a higher rate or uproot your business and move to a more affordable location.
Any improvements add value for the landlord — but not for you. In other words, any additions that you made to your space, such as custom countertops, new flooring, or any other upgrade that you can’t take with you in the event of a move, will benefit the building’s owner.
If you’re ready to purchase a commercial property, one of your first considerations involve financing. That’s where Commercial Direct can help!
Visit our purchase page to learn more about the flexible solutions available to you right now. You can also call us for a one-on-one conversation with one of our commercial mortgage experts.
Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.